There's A Bernie Madoff Victim Fund That Is Still Paying People Back
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The term “Ponzi scheme” was all over the news in the early 2000s—on morning talk shows and printed in all the papers—and the term has resurfaced again nearly 15 years later.
This is thanks, in part, to the four-part Netflix docuseries that dropped on Jan. 4 that is based on the crimes of fraudster Bernie Madoff and the unraveling of his infamous Ponzi scheme.
And while the series, Madoff: The Monster of Wall Street, takes a historical view, the financial term has also been cropping up lately because of some other dramatic developments within the finance world.
Specifically, the dramatic fall of a crypto currency company, FTX, dubbed a "Ponzi scheme" by at least one witness testifying for a Senate committee, has been bringing back memories from Madoff's legal battles in the early 2000s.
This winter, the U.S. federal prosecutors issued multiple charges of securities fraud, campaign finance violations and money laundering this month against a man named Sam Bankman-Fried, the ex-CEO of cryptocurrency exchange FTX, after the exchange went bankrupt and investors were left scrambling, per CNBC.
Bankman-Fried, who also faces charges from the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, was arrested in the Bahamas in December before being extradited to America on a $250 million bail bond, according to Tech Crunch.
Bankman-Fried was charged with two counts of wire fraud and six conspiracy counts to do things like launder money and commit campaign finance violations, per Reuters. These charges mean he could face up to 115 years in prison if he's found guilty. He pleaded not guilty in a New York court on Jan. 3, per Tech Crunch.
So, while you’ve probably heard of Ponzi schemes before, it’s understandable to be a little fuzzy on the details. So, what is a Ponzi scheme? Here’s what you need to know.
What is a Ponzi scheme and why is it illegal?
A Ponzi scheme is a type of investment fraud that pays existing investors with funds collected from new investors, according to the U.S. Securities and Exchange Commission (SEC).
People who organize Ponzi schemes usually promise that they’ll invest your money and bring you high returns with little or no risk on your end, the SEC says. However, that money is never actually invested.
Instead, schemers use new investment money to pay their original clients who previously invested money, passing it off as a "return on investment." Some schemers may even keep some of the initial investment money from new clients for themselves. And because money isn’t actually being invested in Ponzi schemes, new investors have to be continuously recruited to keep the scheme going.
Where does the name "Ponzi scheme" come from?
It finds its roots in the story of an Italian immigrant named Charles Ponzi, who fooled investors in America in the 1920s with a postage stamp speculation scheme, per the SEC. At the time, the postal service had developed international reply coupons that allowed a sender to pre-purchase postage and include it in their letters or packages, Investopedia explains. The mail recipient would take the coupon to a local post office and exchange it for the stamps needed to send a reply.
Ponzi promised people returns of 50 percent in 45 days or 100 percent in 90 days. Instead, he simply redistributed the money from new clients and told investors that they made a profit, Investopedia says.
What were the biggest Ponzi schemes?
Charles Ponzi's scheme was definitely a major one, but the largest Ponzi scheme in history was actually one run by financier Bernard "Bernie" Madoff, who was busted in 2008 and sentenced to 150 years in prison, per Investopedia.
How did Bernie Madoff’s Ponzi scheme work?
Madoff was an American financier who specialized in penny stocks, i.e. low-priced shares that traded on the over-the-counter market (this came before the NASDAQ exchange), according to Britannica. He called his company "Bernard L. Madoff Investment Securities," and he worked as the chairman.
Madoff formed close friendships with wealthy businessmen in New York City and Palm Beach, Florida, and brought them on as clients. And while the people who invested with Bernie saw big returns, he wasn't actually investing their money. He just used money from new recruits to payout older clients. And in the process, he skimmed off plenty of money for his firm, family, and friends, Brittanica says.
How big was Bernie Madoff’s Ponzi scheme?
Well, he stole a *lot* of money from thousands of clients. The total amounted to more than $64.8 billion, according to The New York Times.
In 2009, Madoff pleaded guilty to 11 federal felonies and admitted to his Ponzi scheme. He died in prison of kidney disease in 2021 at the age of 82, according to the Associated Press.
In recent years, the Justice Department has been reallocating money to his victims through the Madoff Victim Fund, and this year, they redistributed an eighth installment of payments to the tune of $372 million.
Was FTX a Ponzi scheme?
That remains to be proven in a court of law.
Here's what to know so far: When the cryptocurrency exchange filed for bankruptcy, an executive there "described numerous corporate missteps, including the use of software to 'conceal the misuse of customer funds,'" The New York Times reported. The exec went on to say in the filing that he "could not trust that financial statements assembled under Mr. Bankman-Fried’s leadership were accurate."
Now, hundreds of thousands of people can't access their money, which was tied up in FTX.
Bankman-Fried also ran a hedge fund called Alameda Research, which reportedly "held an unusually large amount of FTT [FTX's own cryptocurrency] tokens," the Times reported, via CoinDesk's initial report.
And on Dec. 13, the SEC filed legal documents claiming that “Bankman-Fried was orchestrating a massive, yearslong fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire."
Bankman-Fried's lawyer, Mark Cohen, told The New York Times at the time that his client “is reviewing the charges with his legal team and considering all of his legal options.”
On Tuesday, Jan. 3, Bankman-Fried entered a "not guilty" plea via his lawyer for all eight charges he faces, despite the fact two executives at Alameda and FTX have already pleaded guilty.
Bankman-Fried's trial is set for October 2, 2023. His legal team does not appear to have commented further on the "not guilty" plea with the media at this time.
In the meantime, catch the new docuseries on Bernie Madoff's Ponzi scheme, Madoff: The Monster of Wall Street, on Netflix.
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